(provisional translation)
Subcommittee on International Financial Transactions
of the
Committee on Foreign Exchange and Other Transactions
Recent Developments in International Financial Transactions
and Improvements in Transaction Environments
--New Movements in International Financial Business and Deregulation--
(Interim Report )
Summary 1. Recent developments in international financial transactions
The subcommittee put together its findings from hearings on new movements emerging in the environment surrounding international financial transactions and on issues for consideration.
(1) Progress in electronics
- Cross border capital transactions now have a real-time basis. The development of electric money is under way.
- Improvements in the environment to ensure swift and safe money transfer, and knowing details of transactions are issues for consideration.
(2) Internationalization of financial / capital transactions and diversity of intermediaries
- With increasing internationalization, transactions carried out by entities other than banks are increasing.
- An issue for consideration is improvement in the environment to ensure soundness of intermediaries of international financial transactions and to enable efficient capital transactions and other activities.
(3) Growing derivative transactions and growing importance of risk management
- With the increasing development of hybrid derivative products, more attention is being drawn to the improvement of the risk management systems of financial institutions.
- Issues for consideration are the introduction of a market price accounting principle and improvements in the environment for netting.
(4) International activities of Japanese companies and internationalization of their financial management
- With the internationalization of business activities, the centralized settlement of cross-border or multi-currency transactions among group companies are being carried out by overseas financial subsidiaries.
- One of the issues for consideration is improvement in the system to enable domestic companies to make external settlements efficiently.
(5) Internationalization of the yen and response to settlement risks
- Issues for considerations are improvements in the system to make yen more convenient as the currency for settlements overseas and improvements in the settlement system concerning the yen.
2. Responses of other countries to developments in international financial markets and their systems
The subcommittee put together the findings of its research trip to the United States, United Kingdom, Germany and France to study the institutional framework of their foreign exchange control systems in response to such recent developments.
(1) Dealings with electric money and other developments
The development of electric money is progressing on the assumption that cross-border transactions and multi-currency transactions can be done freely. Further consideration is needed regarding to the prevention of money laundering.
(2) Legal framework
The United States effects emergency restrictions on individual law basis. European countries have been lifting peace time exchange controls under their basic law equivalent to the Foreign Exchange and Foreign Trade Control Law of Japan.
(3) Emergency restrictions
Each country has provisions for placing restrictions on transactions in case of emergency.
(4) Intermediaries of foreign exchange transactions
In many countries deposit takings and money transfers are the exclusive business of banks. There are moves, in some countries, to impose some qualification requirements on money exchangers because of money laundering. Also, in Europe there is a move to impose qualification requirements on those engaging in currency derivative transactions as a business in view of the need to protect customers and maintaining the soundness of the financial system. The United Kingdom has already introduced such restrictions.
(5) Other restrictions on transactions
In Europe and in the United States, money laundering prevention laws and other regulations stipulate prohibition of external transactions concerning illegal activities and stress the duty of financial institutions to verify transaction parties' identification.
(6) Reporting system
Many countries stipulate, with penalties for non-compliance, reporting for statistics purposes by parties of transactions that bypass banks. Some of these countries stipulate even more reporting for other administrative surveillance purposes. In some European countries, a paperless reporting system and 'one writing' reporting have been introduced.
3. Assignments for the subcommittee
(1) The need for improvements in the environment for international financial transactions are stressed in various aspects. It is important to pick up major issues for consideration for the foreign exchange control system and to formulate ideas for deregulation. At the same time, it is necessary to put in place a system to know details of transactions and for analyzing such data , such as a reporting system and other mechanism.
(2) As for electric money it is necessary to give consideration to an institutional response framework for the scheme of the system, based on experimentation and other developments by the developers.
4. Major issues for considerations
(1) 'Deregulation of settlements' and "Enlargement of foreign exchange business by securities companies' are urgently needed for the following reasons:
- Every external transaction involves settlement which has direct impact on the efficiency of funds management by the transaction parties. The current permission granting system cannot sufficiently meet diversification and transactions developments.
(2) The need for deregulation in other areas are pointed out. Issues for considerations, listed below, from a. to g., are thought to be the major issues in considering deregulation, on which, opinions below are expressed.
- Prior permission, notices, and the bank's duty to ascertain lawfulness of transactions
Many pointed out the need to change the permission and notice requirements for reporting after transactions. The same as has been done in Europe and the United States. On the other hand, the need for putting a certain checking system in place, similar to the one in Europe and the United States, which check payees, was pointed out.
l Some questioned the need and effectiveness of emergency restrictions to protect against severe exchange rate volatility. Others pointed out the need to retain some form of checking system which enables the authorities to adequately respond to emergencies, including incidents similar to the Mexican currency crisis. On the other hand, committee members took note of the growing possibilities of risk contagion among markets, as seen in Mexican currency crisis.
- Many stressed the need to keep the mechanism of emergency restriction implementation, such as that of economic sanctions, in the foreign exchange control system.
- Members took note of the need for keeping the effectiveness of emergency restrictions as transactions that bypass banks grow.
Opinions were expressed that intermediaries of foreign exchange transactions should not necessarily be limited to authorized foreign exchange banks. Others pointed out the need of setting proper qualification requirements, supervision, and market discipline, in view of keeping the effectiveness of emergency restrictions, knowledge of details of the transactions, soundness of the settlement system, customer protection and other matters.
- There was an opinion that it is natural to introduce new reporting requirements after transactions as the flip side of deregulation on payments and capital transactions.
- There was an opinion that, concerning the range of information required and reporting costs, the following measures should be taken: consolidation and abolition of reporting requirements should be made together with clarification of purpose and with the balancing of burden and benefit; consideration should be given urgently to introducing measures to reduce reporting costs, such as introducing a paperless reporting system and a 'one-writing' reporting system.
In Europe and in the United States, a variety of laws stipulate various restrictions and reporting requirements for the purpose of preventing money laundering and other violations. In Japan, such illegal activities are prevented by ascertainment of lawfulness by authorized foreign exchange banks.
There was an opinion that the need for restrictions based on currency sovereignty has disappeared. But another opinion was that there is a need to consider its necessity in the long term.
There was an opinion that intermediaries should be allowed to engage in outsourced foreign exchange transaction processing business. Other opinions expressed the need for deregulation in the sphere of business that intermediaries can engage in.
5. Schedule of the subcommittee
The subcommittee is expected to continue its discussions on the fundamental review of the foreign exchange control system on the basic issues for consideration, such as maintaining effectiveness of emergency restrictions, necessary reporting requirements, qualification requirements of intermediaries and their supervision. The subcommittee is expected to put together its final report in June.